Members Of Insider Trading “Club” Were Good At Obtaining Material Non-Public Information, Not So Good At Playing It Cool On Conversations Recorded By The Feds

Later this week, Anthony Chiasson, a Level Global co-founder, and Todd Newman, a former Diamondback portfolio manager, will go to trial in Federal Court for allegedly making $67 million in ill-gotten gains, based on inside information they obtained about Nvidia Corp and Dell Inc. According to U.S. Attorney Preet Bharara, Chiasson and Newman, who’ve both pleaded not guilty, were able to rack up all their profits by teaming up with a bunch of friends and forming an insider trading club, which is a lot like a book club or fight club in that they took roll, traded canapé duties, and drank Pinot Grigio, but different in that instead of discussing The Art Of Fielding or punching each other in the face, they spent every Monday night from 7 to 9 sharing material non-public information with each other.

“This case describes a tight-knit circle of greed on the part of professionals willing to traffic in confidential information,” Bharara said when the charges were announced in January. “It was a circle of friends who essentially formed a criminal club, whose purpose was profit and whose members regularly bartered inside information.”

In the beginning, when the club was first formed, there was a spirit of camaraderie, as the members happily traded tips for everyone’s mutual benefit. Unfortunately, things started to break down when some people agreed to cooperate with the government by recording their friends admitting wrongdoing in exchange for leniency. Former Diamondback analyst Jesse Tortora, for instance, attempted to incriminate fellow club member Danny Kuo on a call the FBI directed him to make on December 1, 2010, a conversation that Chiasson and Newman’s lawyers are now trying to use as evidence that Tortora, who will be testifying against them lacks credibility, based on the fact that when asked by Kuo if his phone was being tapped, Tortora didn’t say “Yup! Helping the Feds build a case against you, actually.” Instead he went with this:

“What’s happening, man?” Tortora asked during the call, according to a transcript prosecutors submitted to the court.

“Dude, is your phone tapped?” Kuo replied.

“Wait, is the phone tapped?” Tortora asked, adding, “Why do you ask that?”

“Wait, is the phone tapped”? “Why do you ask that”? Come on, Torts, act like you’ve done this before. Still, despite losing major points for repeating the question– you never repeat the question!– and the extremely unconvincing “Oh, why do you ask” attempt to act natural and not like he was working for the government, Tortora ultimately recovered and left Kuo suspecting nothing, as evidenced by his parting tip, re: how to keep the G-man off your trail.

After Kuo and Tortora discussed defense strategy to explain their trades were made after legitimate research, Kuo concluded the call with a final warning to Tortora about making future calls from a personal telephone, according to the transcript. “I would seriously invest in some quarters, and start calling from 7-Elevens,” Kuo said.

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If you're even thinking about asking the question "is your phone tapped?" You should immediately hang up and make no effort to return calls to the person in question.
-Boseky, Ivan F., 1988, "Insider Trading Handbook." California. Lompoc Federal Prison Press.

“This case describes a tight-knit circle of greed on the part of professionals willing to traffic in confidential information,” Bharara said when the charges were announced in January. “It was a circle of friends who essentially formed a criminal club, whose purpose was profit and whose members regularly bartered inside information.”

The more frequently you monitor your portfolio, the more likely you are to observe a loss. This is likely to cause short-sighted decisions and could hurt your investment performance. If you are checking your portfolio more than once per quarter, you’re doing it too much.